Question

) A firm wants a buyer adjust their purchasing amount and frequency by changing the price it charges so that they purchase the target times per year. For example, if the firm purchases 10 times a year a firm might want it to purchase 5 times yearly instead. The firm recognizes that an incentive will have to be offered to do this and has set the incentive as the amount the purchaser would save in total (based on total material cost as used in inventory analysis) from the current cost to the purchaser. Data on the customer is given below as well as the target savings identified the firm thinks is required to get the purchaser to change their buying pattern.

Current Order Amt	Order per Year	Current Price	Order Cost	Holding %	Target Orders/ yr	Incentive Savings
200	17	125.00	400.00	40.0%	4	4,000.00

NOTE: The customer may not be applying EOQ to its current ordering quantity and frequency.

a. What is the total annual cost to the customer of the current ordering policy?

b. What is the highest price the seller can offer the customer so the customer orders 4 times yearly and meets the targeted savings?

Answer 1

ANSWER :  

given data

Q = 200

S = 400

P= 125

N= 17

Holding cost year = R = 40 %

annual demand = D = Q * N

= 200 * 17

= 3400

Total annual cost = D * P + N * S + ( Q / 2) * R * P

= 3400*135 + 17 * 400 +( 200 / 2 ) * 50

= 459000 + 6800 + 100*50

= 459000 + 6800 + 5000

= 470800

( A )

total annual cost to the customer of the current ordering policy = $ 470800

( B )

TARGET ORDERS N = 4

Incentive = 4000

Total annual cost = 470800 - 4000

= 466800

no of orders = 4 times

order quantity = Q = D / N = 3400 / 4

= 850

TOTAL ANNUAL COST = D * P + N*S + (Q/2)*R*P

466800 = 3400 * P + 400 * 4 + ( 850/2) *40% * P

466800 = 3400 (P) +1600 +425 (0.4) P

466800 = 3400 P + 1600 + 170 P

466800 = 3570 P +1600

465200 = 3570 P

P =465200 / 3570

P = 130.30

the highest price the seller can offer to the customer orders 4 times yearly and meets the targeted savings = $130 . 30

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